Friday, December 30, 2011

An important part of the human talent development function is continuous education and upgrading of skills and competencies - from senior management to down the chain. This is the message which Bank Negara Malaysia's Governor Dr. Zeti Akhtar Aziz stressed in her keynote address at the launching in December at Sasana Kijang of the latest such initiative, Islamic Banking and Finance Institute Malaysia (IBFIM) Islamic Finance Qualification Framework & Progression Route (IFQFPR), which focuses on 'Talent Development in Islamic Finance over the Next Decade'.

According to IBFIM, IFQFPR is an innovative training framework that provides a progressive structured route to the acquisition of the relevant knowledge for the different levels throughout the career of the workforce in the industry. Successful completion of the comprehensive series of programmes would lead to qualifications at three different levels. The modules of the programmes have been developed with extensive consultation with the industry. The framework also offers flexibility in learning, as participants can complete the modules at their own pace.

"Important in the offering of these programmes," explained Dr. Zeti, "is that there needs to be clarity in the qualification that is earned so that it avoids confusion with other qualifications offered by other centres of learning to those practitioners aspiring to gain qualifications in Islamic finance. Our resources for investment in human capital development for the industry must be optimised. This would enhance Malaysia's potential to become a centre of excellence for education in Islamic finance."

Islamic finance is the most rapidly growing financial market segment not only in Malaysia but also in several other jurisdictions. As such, advised Dr. Zeti, in a highly dynamic and challenging environment, talent development for the financial services industry has become an even more important agenda to ensure that its growth and development is supported by the necessary skills and capabilities.

Malaysian Islamic financial system is the most progressive, comprehensive and competitive. The market share of Islamic banking assets of total banking industry has grown from only 6.9 per cent in 2000 to 22 per cent in 2011. Islamic finance accounted for 2.1 per cent of GDP in 2009, as compared to only 0.3 per cent in 2000. This has led to greater job creation where employment in Islamic financial industry accounts for 11 per cent of total employment in the financial sector. Malaysia of course has also opened up its Islamic finance market to foreign players, and Malaysian Islamic financial institutions at the same time are expected to expand beyond national boundaries to increase economic and financial linkages with other parts of the world in the pursuit of more competitive returns and rewards.

"This rapid internationalisation of the financial system and technology advancement," maintained Dr. Zeti, "will demand a corresponding increase in quality skills and expertise of the industry. Talent upscaling will be even more important in the next decade, to steer the industry's advancement in the increasingly complex and competitive financial ecosystem. A strong and dynamic workforce will be one of the important pillars for the industry to remain stable and competitive. It will also serve as a catalyst to spur innovation."

BNM anticipates that over the next 10 years, a workforce of about 200,000 employees would be required, which is an increase of 56,000 people from the current 144,000 employees. There will therefore be strong demand across the financial sector, particularly for specialised skills in high growth and niche areas such as wealth management, Shariah advisory, corporate finance and investment advisory services.

Dr. Zeti identified several challenges for human capital development in the Islamic finance industry going forward:
• Human capital development needs to be comprehensive and holistic in meeting the requirements for all levels. It must meet the specific requirements of the workforce career progression, from the pre-employment stage, during employment and up to the leadership positions. Talent development solutions must also be for beyond the circle of the financial services community, to include other business communities, such as legal fraternity, Government officials and IT solution providers.
• The education and training programmes in Islamic finance needs to achieve the highest quality, be credible and globally recognised. To ensure the standards, the required infrastructure for standard setting and accreditation for Islamic finance training and education has now been put in place. The Asian Institute of Finance (AIF) is ready to provide accreditation to training programmes offered by training institutes following a rigorous assessment under the new Assessment and Accreditation Framework and to ensure the highest standard of the trainings offered. The Association for Chartered Islamic Finance Professionals, a body entrusted to raise the quality standards and professionalism of Islamic finance practitioners, would also contribute to achieve this objective.
• There needs to be greater partnerships and collaboration between the industry and academia to align training and development with the requirements of the industry. Greater involvement by the financial institutions is needed in designing the academic and training curriculum, and providing real business exposure and training through internship and sharing of experiences. Industry-universities partnership can also take the form of "summer school" programmes that emphasise on practical aspects of Islamic finance via business operation simulations. More structured continuous learning programmes are also needed for practitioners to sustain their professional competencies.
• Research is an important investment for long-term competitiveness of the industry and is a key driver for greater innovation. Joint research initiatives should extend beyond geographical boundaries, with cross-border initiatives and convergence of ideas. Further in-depth research on contemporary Shariah issues relating to risk mitigation, liquidity management and hedging would facilitate the generation of new ground-breaking developments in Islamic finance. Greater involvement of the industry is essential not only to provide funding support, but also to give perspectives that contribute to the implementation of the research output.

But in reality, the impact on the Islamic finance industry of the global financial crisis has been more indirect - more due to the economic impact in the markets in which they operate.

The Blueprint, themed "Strengthening Our Future" is a strategic plan that charts the future direction of the financial system as Malaysia transitions towards becoming a high value-added, high-income economy. It also positions the country to reap the benefits of increasing regional economic and financial integration, its leadership in Islamic finance to develop Malaysia as an international Islamic financial centre and the growing internationalisation of the Islamic finance industry.

In his speech, the Prime Minister described the Blueprint "a far-sighted vision of the systems and strategies we will need to put in place to ensure a more competitive, diversified and dynamic financial sector for the future. Built on the back of many years of strong performance, it is a blueprint designed to take Malaysia's financial sector to the next level as we continue together on the path towards developed nation status. To get there, we will need to forge deeper links between Malaysia and regional economies in other parts of the world. We will also need to break new ground in positioning Malaysia at the forefront of the international market in Islamic finance. I am confident this Blueprint will achieve both those things."

The Blueprint, stressed the Prime Minister, also complements the government's New Economic Model and Economic Transformation Programme, which provides for greater liberalisation of the services sector. Indeed the Blueprint itself outlines a strategic approach to the further liberalisation of the financial sector, which is not only necessary but is also an important means of enhancing the country's future growth and the strength, diversity and competitiveness of the financial sector.

"I want to see our financial sector playing a key role in the cross-border intermediation of Asia's financial funds, with Malaysia's financial institutions continuing to venture abroad and to replicate their domestic success in these new markets. As Islamic finance becomes an ever more important component of the global financial system, Malaysia should continue to develop and to capitalise on our world-beating expertise," he added.

The Blueprint is a comprehensive document focusing on new areas aimed at strengthening the competitiveness and efficiency of the financial sector and its potential role in facilitating Malaysia's ongoing economic transformation and greater regional economic and financial integration. It also comprises 69 recommendations aimed at helping the financial sector to meet the economic and financial realities of the coming decade and to achieve the vision for the financial sector in 2020.

Meanwhile, Dr. Zeti in her speech projected that emerging economies will assume a more significant role within the global economic landscape. By 2030, emerging economies are deemed to account for 60 per cent of total world output, from the current 40 per cent.

Together with other changes including in the domestic economy, the Malaysian financial system, she maintained, enters this new environment from a position of strength. Bank Negara's first Financial Sector Masterplan (FSMP) 2001-2010 indeed achieved all its objectives. During this decade Malaysia enacted wide ranging legislation and financial infrastructure that has given greater certainty and predictability in the financial system. This includes the Central Bank of Malaysia Act 2009 and the Financial Services Act which is expected to be tabled in Parliament in 2012.

This has led to Malaysia having today a deep and vibrant bond and sukuk market which is the largest in South East Asia and a comprehensive Islamic financial system that is recognised as among the most advanced in the world.

It is envisaged that by 2020, the financial system is expected to expand from the current 4.3 times to six times of GDP. Correspondingly, the financial sector contribution to nominal GDP is projected to rise from 8.6 per cent to between 10 to 12 per cent in 2020. More than half of total financing in 2020 will be raised through financial markets, while Islamic finance will continue to increase in prominence, growing at a faster pace to account for 40 per cent of total financing.

The Blueprint, explained Dr. Zeti, has adopted an integrated approach that reflects a financial sector that has increasing linkages between the various sub-sectors in the financial system. The recommendations, in the Blueprint are thus centred on achieving nine major areas:
• effective intermediation for a high value-added, high-income economy;
• the development of deep and dynamic financial markets;
• greater shared prosperity through financial inclusion;
• strengthening regional and international financial integration;
• internationalisation of Islamic finance;
• safeguarding the stability of the financial system;
• achieving greater economic efficiency through electronic payments;
• empowered consumers;
• and talent development for the financial sector.

While Malaysia has made significant inroads in becoming an international Islamic financial centre, efforts will continue to spearhead the internationalization of Islamic finance to facilitate greater cross-border Islamic financial activities. In strengthening the legal and Shariah frameworks and further advancing Malaysia's thought leadership in Islamic finance, a single legislated body to be the apex authority on Shariah matters in Islamic finance will be established.

Dr. Zeti stressed that in the Blueprint, financial liberalisation will be pursued in the best interests of Malaysia. According to her "The goals for financial liberalization are twofold: firstly, to improve allocative efficiency to productive economic activities, to increase the operational efficiency and lower further the intermediation costs, thus encouraging greater financial innovation. Secondly, to strengthen further Malaysia's economic and financial linkages with the region and other parts of the emerging world. Key recommendations in the Blueprint include more flexible limits on foreign participation in financial institutions, the issuance of new licences to financial institutions with specialised expertise that are able to contribute to Malaysia's economic aspirations and financial sector development."

Dec 30, 2011 -
MARC has affirmed its AAAID long-term rating on Gas District Cooling (Putrajaya) Sdn Bhd’s (GDC Putrajaya) RM300 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS). The rating outlook is maintained at stable.
The rating reflects GDC Putrajaya’s position as the sole producer and supplier of chilled water for the air-conditioning needs of all government premises and commercial buildings within the Putrajaya district, its financially strong offtakers and secure off-take agreements, and the financial support provided by its holding company, Putrajaya Holdings Sdn Bhd (PJH). MARC maintains a long-term rating of AAA/Stable on Putrajaya Holdings Sdn Bhd.

The supply of chilled water produced is secured via long-term supply agreements with the government of Malaysia, PJH and other offtakers. The offtake agreements provide for availability payments to be made to GDC Putrajaya on the basis of an agreed baseload volume and variable charges on actual consumption of the chilled water supplied. The demand charges, which are payable regardless of offtake volume, impart stability and predictability to the issuer’s revenue and cash flow generation. In the financial year ended March 31, 2011 (FY2011), the contracted demand on the chilled water supplied increased by 3.0% (FY2010: 8.1%), while its available capacity reached 83.7% (FY2010: 81.1%). Nonetheless, the total actual utilisation remains low with a load factor of 26.4%. GDC Putrajaya is currently building the Plant 4 to augment the production capacity of Plant 2. The construction of Plant 4 has been awarded to Sunway Construction Sdn Bhd with a contract value of RM42.0 million and will be fully operational by August 2012.
GDC Putrajaya has recorded higher revenue of RM125.6 million (FY2010: RM123.9 million) in FY2011. This is largely attributable to the revised chilled water tariffs and increase in chilled water demand from Plant 2 during the financial year. MARC notes increases in major cost components with the exception of management fees and maintenance expenses. GDC Putrajaya’s cost of sales decreased by 12.1% to RM104.8 million (FY2010: RM117.6 million) largely due to lower management fees and maintenance expenses. GDC Putrajaya turned in its first profit in FY2011 since its inception, posting an operating profit of RM22.3 million (FY2010: RM6.7 million) and a profit before tax of RM6.5 million. Correspondingly, its cash flow from operations and free cash flow increased to RM49.6 million (FY2010: RM39.9 million) and RM47.4 million (FY2010: RM25.9 million) respectively. GDC Putrajaya’s annual finance service coverage ratio was 7.78 times in FY2011, above its covenant level of 1.10 times.

For the six-month period ended September 30, 2011, GDC Putrajaya registered revenue of RM72.1 million and profit before tax of RM1.7 million, well above its previous financial year. However, free cash flow has declined to RM12.9 million compared to RM25.5 million in the previous corresponding period due to capital spending on Plant 4 and the repayment of advances to its holding company. As at September 30, 2011, the total advances outstanding from its holding company have declined to RM36.6 million from RM52.5 million as at end-March 2011.

MARC cautions that GDC Putrajaya’s profitability and cash flow will decline in the near-term with the hike in natural gas tariffs. Effective June 1, 2011, the new gas tariff for GDC Putrajaya, which falls under tariff category D, is RM14.61/mmBTU. The tariff represents a 36.5% increase over the last revised tariff of RM10.70/mmBTU, which was set on March 1, 2009. The gas tariff will be hiked by RM3/mmBTU every six months over the next five years and full market price thereafter.

The stable outlook assumes a reasonable outcome from GDC Putrajaya’s ongoing negotiations with its offtakers to increase its certainty of cost recovery with respect to rising natural gas costs in near to intermediate term. MARC continues to derive comfort from PJH’s historically demonstrated willingness to support GDC Putrajaya’s scheduled BaIDS redemptions by making advances to its subsidiary.

Published on 29 December 2011
RAM Ratings has reaffirmed the AAA rating of Premium Commerce Berhad’s (“PCB”) Class A Notes Series 2010-B (“2010-B Notes”) while upgrading the rating of its Class B Notes, from AA2 to AAA; both long-term ratings have a stable outlook.
This transaction involves the securitisation of automobile hire-purchase (“HP”) receivables from Tan Chong & Sons Motor Company Sdn Bhd (“TCSM”) and/or TC Capital Resources Sdn Bhd (“TC Cap”) under PCB’s RM2 billion Medium-Term Notes (“MTN”) Programme. The 2010-B Notes represent the fourth of 5 issues under PCB’s RM2 billion HP Receivables-Backed MTN Programme (“the Programme”). As at 31 October 2011, RM181 million of the Class A and Class B Notes remained outstanding.

The ratings of the Class A and Class B Notes are premised on the available credit enhancement in the form of overcollateralisation (“OC”) that provides sufficient buffer to cover loss of cashflow arising from defaults and prepayments under an AAA stressed scenario. The higher OC ratios for the Class A and Class B Notes of 16.19% and 14.20%, respectively, are supported by the healthy performance of the underlying securitised portfolio and the faster-than-assumed deleveraging of the transaction. As at end-September 2011, the cumulative net default rate for the HP portfolio backing the 2010-B Notes stood at 0.03%, well below our base-case assumption of 0.55%. In addition, the average monthly prepayment rate stood at 0.27% – broadly within our low-prepayment-rate assumption of 0.30% per month. Going forward, RAM Ratings expects the default performance of the underlying securitised pool to remain within our expectations. With the overnight policy rate expected to be maintained until at least 1H 2012 amid the lacklustre global economic outlook, prepayments should remain subdued.

The ratings are also supported by the transaction’s legal and payment structures. These mainly involve the pass-through mechanism that allows collections - after meeting senior expenses and coupon obligations - to be deployed for early redemption of the Notes on each quarterly coupon-payment date, in the pre-determined order of priority. This partially addresses the negative carry of the Notes Series due to low investment returns.

As at 31 October 2011, the HP receivables in the portfolio comprised 3,869 HP contracts, with an outstanding principal balance of RM180.29 million. These loans had a weighted-average seasoning of about 19 months and a weighted-average remaining tenure of 46 months. The average size of the loans stood at RM60,910 as at the same date.

Published on 29 December 2011
RAM Ratings has reaffirmed the respective AAA, AAA, AA2, AA3 and A1 ratings of Golden Crop Returns Berhad’s (“Golden Crop” or “the Issuer”) Tranche 3 Series 1, 2, 3, 4 and 5 Sukuk Al-Ijarah (“Sukuk”), with a stable outlook. The reaffirmation is premised on the performance of Golden Crops’ plantations, which has fallen within our expectations. This in turn supports our assessed valuation and maintains the loan-to-value (“LTV”) ratios as well as debt service coverage ratios (“DSCRs”) at levels that commensurate with their respective ratings.

Golden Crop is a bankruptcy-remote, special-purpose company that had been set up as the financing vehicle for the sale-and-leaseback transaction involving 17 plantations and 5 mills under the purview of entities within the Boustead Holdings Berhad Group (“Boustead”). Following the redemption of the Tranche 1 Sukuk and Tranche 2 Sukuk in November 2008 and November 2010, respectively, the remaining 13 estates and 4 mills (collectively, the “Plantation Assets”) within the transaction continue to provide credit support for the RM242 million of outstanding sukuk.
The transaction is further underpinned by the senior-subordinated structure of the Sukuk and its structural features that support the ratings. These are, however, moderated by the vulnerability of the Plantation Assets’ performance to the volatile price movements of crude palm oil (“CPO”). “Nevertheless, the plantation companies (“the Lessees”) have been able to fully and promptly meet the payments on their scheduled lease obligations,” notes Siew Suet Ming, RAM Ratings’ Head of Structured Finance Ratings.

In FYE 31 December 2010 (“FY Dec 2010”), Golden Crop’s yields on fresh fruit bunches (“FFB”) decreased slightly to 18.2 metric tonnes per hectare (“MT/ha”) (FY Dec 2009: 18.8 MT/ha) – a result of heavier rainfall. There was also a shortage of skilled labourers to harvest the aged, taller trees of its estates in Sabah. In 1H FY Dec 2011, Golden Crop achieved an overall FFB yield of 9.1 MT/ha, marginally better than the industry’s 9.0 MT/ha. Going forward, we expect Golden Crop’s estates to generate FFB yields of around 18 to 19 MT/ha per annum.

In FY Dec 2010, Golden Crop generated RM137.9 million of cashflow (FY Dec 2009: RM119.1 million), driven by a higher average selling price for FFB of RM460 per MT (2009: RM433 per MT). In 1H FY Dec 2011, the estates generated RM96.0 million of cashflow (1H FY Dec 2010: RM90.2 million) while the average FFB selling price exceeded RM700 per MT. We also note that cheaper fertilisers reduced Golden Crop’s average production cost to RM3,725 per hectare in fiscal 2010 (FY Dec 2009: RM3,984). Nonetheless, plantation costs are expected to rise over the medium term, pushed up by labour issues and more costly fertilisers. This is, however, partially addressed by Boustead’s initiatives of enhancing labour productivity via mechanisation and replanting with higher-yielding trees.

Thursday, December 29, 2011

Published on 28 December 2011
RAM Ratings has reaffirmed the AAA rating of Mid Valley Capital Sdn Bhd’s (“MVCap”) Class 1 Series C to F Redeemable Secured Bonds (“the Bonds”), with a stable outlook. MVCap - a wholly owned subsidiary of KrisAssets Holdings Berhad (“KrisAssets”) - had been set up as the funding vehicle for the Al-Bai Bithaman Ajil (“ABBA”) financing transaction between MVCap and Mid Valley City Sdn Bhd (“MVC”). The Bonds’ primary source of repayment stems from the cashflow generated by Mid Valley Megamall (“Megamall” or “the Mall”), which is owned and operated by MVC.

On 9 September 2011, MVCap had obtained the bondholders’ approval to extend the expected maturity date and legal maturity dates of the Bonds for an additional 5 years from its 7th anniversary, i.e. 15 September 2011. RAM Ratings highlights that the extension has no impact on the rating of the Bonds as we do not perceive this as a distressed scenario.

The rating reaffirmation is premised on Megamall’s healthier pre-tax operating cashflow of RM174.71 million in FY Dec 2010 (+10.7%), compared to our sustainable-cashflow assumption of RM116 million. The better-than-expected showing is mainly attributable to Megamall’s stronger average rental rate (“ARR”), almost-full average occupancy rate (“AOR”) and healthier operating margins. Moving forward, we envisage the Mall’s ARR to continue trending upwards, premised on its locked-in tenancies and strong appeal to retailers.

During the reviewed period, Megamall’s RAM Property Score had been revised from R-4.40 to R-4.75, which corresponds to a capitalisation rate of 8.50%. The revision had been premised on Megamall’s consistently strong tenancy mix, as reflected in its strong ARRs and AORs. The resultant higher adjusted valuation of RM1.37 billion for the Mall and the further deleveraging of the transaction had led to a higher loan-to-value ratio of 14.66% and stronger debt service coverage ratio of 5.80 times, which remain commensurate with the AAA rating of the Bonds.

Meanwhile, we note that MVCap has proposed to amend the transaction’s security arrangement, to allow Megamall to be shared on a pari passu basis with the investors of KrisAssets’ RM300 million Redeemable Convertible Bonds, subject to the bondholders’ approval. RAM Ratings notes that such amendments would require, among others, an alignment of the security interest between the bondholders of MVCap and KrisAssets. On this note, we will closely monitor the transaction for new developments. Any rating impact on the Bonds will be subject to RAM Ratings’ full review and assessment of the proposed amendments to the legal documents.

Published on 28 December 2011
RAM Ratings has reaffirmed the AAA(bg) rating of ORIX Leasing Malaysia Berhad’s (“ORIX Leasing” or “the Group”) up to RM150 million Bank-Guaranteed Medium-Term Notes Programme (“BGMTN”) and the P1 rating of its up to RM150 million Commercial Papers Programme (“CP”); the long-term rating has a stable outlook. The AAA(bg) rating reflects the strength of the irrevocable and unconditional guarantee from Malayan Banking Berhad, which carries AAA/Stable/P1 ratings from RAM Ratings. The backing of this guarantee enhances the credit profile of the BGMTN beyond ORIX Leasing’s inherent stand-alone credit risk.

ORIX Leasing is wholly owned by ORIX Corporation of Japan and has a track record of more than 30 years in the Malaysian leasing market. Its credit fundamentals had remained sound during the period under review. The Group’s gross impaired-loan (“GIL”) ratio stood at a healthy 2.9% as at end-September 2011, with a high GIL coverage level of 125.3%. Moving forward, we expect the Group’s asset quality to remain stable, underscored by the management’s prudent credit culture.

Notably, ORIX Leasing’s profit performance has remained stable. While the Group’s pre-tax profit climbed up to RM90.7 million in FYE 31 March 2011 (“FY Mar 2011”), supported by its larger share of an associate’s profits, its operating profit stayed steady at RM84.1 million (FY Mar 2010: RM82.4 million). In 1H FY Mar 2012, the Group chalked up a pre-tax profit of RM51.6 million, supported by healthy loan growth. Not being able to accept deposits like commercial banks, Orix Leasing relies much on bank borrowings and the debt capital market to fund its lending operations. As at end-September 2011, the Group’s gearing ratio stood at 2.4 times while its capitalisation level remained strong, with a capital-adequacy ratio of about 28%.

Published on 27 December 2011
RAM Ratings has reaffirmed Bank Pembangunan Malaysia Berhad’s (BPMB or the Bank) long- and short-term financial institution ratings at AAA and P1, respectively. At the same time, the long-term rating of the Bank’s up to RM7 billion Conventional Medium-Term Notes (MTN) and/or Islamic Murabahah MTN Programmes has also been reaffirmed at AAA. Both long-term ratings have a stable outlook.

BPMB is perceived as being integral to the Federal Government, premised on the Bank’s strategic role and continued involvement in the socio-economic development of Malaysia. As a development financial institution, BPMB functions as a key conduit for the Federal Government in developing its mandated infrastructure, high-technology and maritime sectors. About 60% of the Bank’s funding base was government-guaranteed as at end-March 2011. Given BPMB’s role in financing nationally strategic projects, it has historically derived substantial financial flexibility from the Federal Government; in FYE 31 December 2008, the latter extended an irrevocable and unconditional guarantee on RM6 billion of the Bank’s RM7 billion MTN Programmes. This underscores our belief that the entirely government-owned BPMB will receive adequate and timely financial assistance, if required.

On the flip side, BPMB’s asset quality is very weak as some of its credits are embedded with a social-development agenda and are also typically large, particularly with reference to the infrastructure sector, resulting in a high level of customer-concentration risk. Reflective of the stricter recognition criteria for impaired loans following the adoption of Financial Reporting Standards 139, BPMB’s gross impaired-loan ratio stood at a high 12.7% as at end-March 2011. At the same time, about a third of the Bank’s performing loans had restructured and rescheduled terms. Nonetheless, BPMB enjoys a high level of capitalisation, as reflected by its tier-1 and overall risk-weighted capital-adequacy ratios of a respective 30.6% and 32.4% as at end-March 2011, which acts as a buffer against potential credit losses.

INDONESIA: The writing has been on the wall for much of this year and on the 16th December, Indonesia put its money where its mouth is by regaining investment grade status for its sovereign debt, after 14 years of being labeled as junk.
In clearly what is a coup for the country still weighed down by allegations of corruption and an inefficient business landscape, Fitch upgraded Indonesia's long-term foreign and local currency debt ratings to 'BBB-' from 'BB+'. The outlook on both ratings is stable.

With its investment grade rating affording it a wider investor base and lower borrowing costs, any sovereign issuance from Indonesia also has the luxury of being more attractive than European debt - an irony certainly not lost on a country grouped among Southeast Asian nations once vilified by the west amid the 1997/98 Asian financial crisis.

Optimism on the country's investment standing has been driven by its booming economy which remained unscathed by the 2009 global downturn and has reportedly grown more than 6% this year.

Agus Martowardojo, its finance minister, said that the improved credit rating has opened a window for it to refinance high-cost debt at lower rates. The government is also said to be planning the issuance of global Sukuk and US-dollar denominated conventional bonds next year.

However, Fitch noted that weaknesses still remain in the Indonesian system, including corruption and weak infrastructure, with Susilo Bambang Yudhoyono, the country's president, pledging to guard reforms to maintain its economic growth and sustain its return to grace.

MALAYSIA: The government and the central bank, Bank Negara Malaysia (BNM), have launched the Financial Sector Blueprint 2011-2020 in a further effort to transform Malaysia's financial sector and economy; and cement the country's position as a global hub for Islamic finance.

The plan projects that Islamic financing will account for 40% of the country's total financing in 2020 from 29% in 2010. It also seeks to create a domestic system conducive for increasing international financial flows and hence, increase the internationalization of Islamic finance.

Among efforts identified to achieve this is the positioning of Malaysia; including the Labuan International Business and Financial Center, as a global re-Takaful hub.
The blueprint has also called for the presence of more diverse players in the local Islamic finance industry to aid the development of a wider range of products and services, with BNM to issue new Islamic banking and Takaful license only to institutions with specialized expertise.

Malaysia will allow foreign banks to own bigger stakes in local lenders, grant more licenses and loosen short-selling rules, seeking to triple its financial sector by the end of this decade, the central bank said.
In addition, the plan recommends the issuance of more Sukuk from the government and government-linked companies to improve the development of a benchmark yield curve and increase the country's issuer base. Other recommendations include the establishment of global alliances in Islamic finance.

Other initiatives under the plan include the development of Malaysia as a global platform for the listing and trading of Shariah compliant asset classes; in an effort to maximize the country's potential as an international Islamic financial market. This will be achieved by collaborating with other regulatory agencies.
The blueprint also calls for the establishment of alliances with commodity exchanges in other jurisdictions and the identification of different types of commodities to be used as underlying assets.

The Christmas week brought some relief to market tensions, following the euro area‟s pledge to inject EUR 150bn in bilateral loans to the IMF, but especially after ECB lent a massive EUR 489.2bn (19.6% of total assets) to banks at 3-year maturity, and the stellar placement of sovereign debt in Spain. End year squaring and low liquidity however blur the picture. It was a mixed week in the regional markets, with Aldar‟s delisting talks bringing the UAE markets down to multi-year lows, while Saudi Arabia and Qatar closed higher compared to a week ago. In currencies, Sterling registered an 11-month high against the euro and the euro was slightly higher against USD. Oil prices are back up to last week levels, on growing tensions in Iran (tougher US sanctions) and Iraq (domestic political infighting). Gold price is meanwhile marking time waiting for the QE3.

MARC has affirmed its ratings on special purpose company DHTI Capital Sdn Bhd’s (DHTI Capital) RM110 million Islamic Commercial Papers/Islamic Medium Term Notes (Senior Notes) and RM10 million Junior Islamic Medium Term Notes (Junior Notes) at MARC-1ID/AAID and A+ID respectively. The rating outlook is stable. The rating action affects RM28 million of outstanding notes issued under the programme.

The affirmed ratings reflect the credit quality of the rental payment stream from creditworthy mobile operators as the source of repayment of the notes. The payment stream is backed by a ten-year licence agreement between D’Harmoni Telco Infra Sdn Bhd (DHTI), a Johor state-backed company, and the three main domestic telecommunication operators (mobile operators), Celcom Axiata Bhd, Maxis Broadband Sdn Bhd and DiGi Telecommunications Sdn Bhd, that obligates the mobile operators to make monthly rental payments of defined amounts for usage of telecommunication towers. The credit strength of the assigned revenue stream is derived from the strong financial profiles of the mobile operators as well as the predictable lease rentals. These lease rentals are based on agreed-upon rates in a long-term licence agreement which remains in effect throughout the tenure of the programme. The transaction structure provides for the direct payment of all lease rentals into a trustee-controlled collection account, and the transfer of a defined percentage of the collections into a sinking fund account for debt service (60%) with the balance made available for operation and maintenance expenses and payment to DHTI. The aforementioned credit strengths are reflected in DHTI Capital’s comfortable covenant headroom for its finance service cover ratio (FSCR); its FSCR for the 12 months ended December 12, 2010 (FY 2010) was 8.95 times (x) as compared to its minimum required FSCR of 1.5x.

DHTI, the parent company of DHTI Capital, is a licensed Network Facilities Providers (NFP) under the Communications and Multimedia Act 1998. As an NFP, DHTI has the sole right to build, manage, lease and maintain telecommunication infrastructures (including towers) in Johor for a period of ten years until 2015. It is 20%-owned by the Johor state government’s wholly-owned subsidiary YPJ Corporation Sdn Bhd, with the remaining equity interest held by Crestcom Sdn Bhd (66.8%) and Duta Harmoni Sdn Bhd (13.2%). DHTI’s 10-year licence agreement with the mobile operators provides visibility and predictability to DHTI Capital’s rental stream throughout the term of the notes. The quantum of rent payable by the mobile operators is determined by factors such as the height of the towers, the number of mobile operators sharing the towers and the variation orders for the towers (if any). The lease rentals are paid into a trustee-controlled collection account from which 60% of the funds are remitted into a sinking fund account for debt service on the notes and the balance, into an operations account for the maintenance of the towers.

To date, DHTI Capital has issued RM55 million in Senior Notes and RM3 million in Junior Notes, backed by 119 towers. As of September 2011, DHTI Capital has paid down RM30 million of the Senior Notes, leaving outstanding Senior Notes of RM25 million and RM3 million in Junior Notes. Borrowings are adequately covered by receivables and cash/bank balances, with the ratio of assets to borrowings maintained above 1x since inception of the programme.

MARC notes that rental payments from the mobile operators have continued to be timely and the stable outlook for the notes incorporates expectations of continued timely payments from the mobile operators for the towers.

Friday, December 23, 2011

Published on 23 December 2011
RAM Ratings has reaffirmed the AA3/P1 and A2 ratings of Binariang GSM Sdn Bhd’s (“BGSM” or “the Group”) Senior Sukuk and Junior Sukuk (collectively, “the Sukuk”). At the same time, the outlook on the Sukuk’s long-term rating has been revised from stable to negative. The Senior Sukuk consists of BGSM’s RM19 billion Islamic Medium-Term Notes Programme and RM2 billion Islamic Commercial Papers Programme. The Junior Sukuk refers to the Group’s USD900 million Cumulative Non-Convertible Islamic Junior Sukuk. BGSM is an investment-holding company with subsidiaries that are involved in the Malaysian and Indian cellular telecommunication markets.

The negative outlook reflects a decline in the Group’s financial profile over the last few years. Aircel Ltd (“Aircel”), the Group’s 74% subsidiary, has made hefty investments to support network rollout as well as Third Generation and Broadband Wireless Access spectrum acquisition costs in India. As these investments have resulted in substantially increased debt levels at Aircel and are not expected to generate strong earnings in the near term, this has in turn weighed heavily on the Group’s consolidated balance sheet and debt protection indicators. The deepening losses of Aircel, partly a result of higher cost of debt service, have also been compounded by the competitive telecommunications industry in India. The ongoing CBI investigations involving Aircel and continuing regulatory uncertainties affecting the industry may further exacerbate the current strain on Aircel’s operational and financial risks.

The management of BGSM has intimated that it will embark on a restructuring exercise to decouple Aircel from the Group; this is expected to be concluded in the next 9 months. Should the restructuring exercise not be completed within the suggested timeframe, the ratings of the Sukuk will have to be reassessed.

Meanwhile, BGSM’s ratings remain supported by the Group’s position as the largest mobile-services provider in Malaysia. Looking ahead, the steady profit performance and cash-generating aptitude of its Malaysian operations are expected to anchor the Group’s cash-generating ability. Dividends from the Group’s Malaysian operations are expected to continue supporting the annual profit and principal payments under BGSM’s Senior Sukuk (which currently has a fixed maturity profile up to 2022) as well as the annual profit obligations under its Junior Sukuk.

RAM Ratings will be publishing the Sukuk rating rationale in the next few days.

Published on 23 December 2011
RAM Ratings has downgraded the ratings of Lebuhraya Kajang-Seremban Sdn Bhd’s (“LEKAS” or “the Company”) RM785 million Senior Sukuk Istisna’ (“Senior Sukuk’”) to BB1 (from BBB1) and RM633 million Junior Sukuk Istisna’ (“Junior Sukuk’”) to B1 (from BBB3). The negative outlook on the long-term ratings has been maintained. The widening rating differential between the Senior and Junior Sukuk reflects the latter’s subordination in terms of cashflow priority and security. LEKAS is the highway concessionaire for the 44-km Kajang-Seremban Highway (“KSH” or “the Highway”) until May 2039; full tolling operations commenced on 21 September 2010.
The rating downgrades are premised on the Highway’s persistently subdued traffic growth, coupled with its challenging prospects. There has also been limited progress to restructure the Senior and Junior Sukuk since the proposal was mooted in October 2010. As such, RAM Ratings is concerned about LEKAS’s ability to fully meet the Senior and Junior Sukuk’s principal repayments, which will begin in 2014 and 2023, respectively. The negative outlook indicates further downward rating pressure if efforts to restructure the Senior and Junior Sukuk fail to materialise in the near term.

In the first 13 months of full tolling operations, the Highway’s monthly average daily traffic increased slightly to 38,105 vehicles in October 2011, compared to 35,370 vehicles in October 2010. Moving ahead, the North-South Expressway’s (“NSE” - a competing route) recently completed toll-rate restructuring will exacerbate the disparity between the toll rates of NSE and KSH, favouring the former. The widening of the Semenyih stretch of Federal Route 1 (another competing route) since late 2010 will also deter traffic migration on to KSH. Meanwhile, LEKAS has represented that after the completion of the NSE’s tariff restructuring, efforts to restructure the Senior and Junior Sukuk will be intensified. On this note, LEKAS’s restructuring proposal has been delayed by the additional time required to complete a new traffic study for KSH, amid the earlier uncertainties surrounding the NSE’s toll rates.

Meanwhile, the rating of LEKAS’s RM50 million Redeemable Unsecured Loan Stocks (“RULS”) have been downgraded from B3 to D. RAM Ratings has also withdrawn the rating of the RM240 million Redeemable Convertible Unsecured Loan Stocks Programme (“RCULS”), following request from the Company; prior to the rating withdrawal, the RCULS was last rated at D. The respective D ratings of the RULS and RCULS reflect the deferment of the interest payments on both instruments. While interest payments on the RCULS and RULS are deferrable and cumulative under the terms of their trust deeds, failure to meet the scheduled interest payments is classified as a default based on RAM Ratings’ rating definition.

Published on 23 December 2011
RAM Ratings has reaffirmed the AA3 rating of Cerah Sama Sdn Bhd’s (“Cerah Sama” or “the Group”) first issuance of RM380 million under its RM600 million Islamic Medium-Term Notes (“IMTN”) Programme; the long-term rating has a stable outlook. Cerah Sama is an investment-holding company that wholly owns Grand Saga Sdn Bhd (“Grand Saga”) – operator of the Cheras-Kajang Highway (“the Highway”) – and Trupadu Sdn Bhd, its provider of operation and maintenance services.

The Group’s strong business profile remains anchored by its ownership of the Highway. In FYE 31 December 2010 (“FY Dec 2010”), the Highway’s average daily traffic (“ADT”) rose 10.56% year-on-year to 221,498 vehicles, supported by organic traffic growth from developments along its corridor and the completion of upgrading work at the Taman Len Seng-Connaught interchange (completed in April 2010). The double-digit growth is also partially attributable to latch-on traffic from the Kajang-Seremban Highway (or LEKAS Highway). Going forward, RAM Ratings expects the Highway to maintain a steady increase in traffic flow, supported by organic growth.
At the end of FY Dec 2010, Cerah Sama’s funds from operations debt coverage ratio stood at 0.15 times. While this is lower than those of the other AA-rated corporates in RAM Ratings’ universe, we draw comfort from the transaction’s financial covenants and cash-trap mechanisms, which prioritise the Group’s obligations to the IMTN holders against payments to shareholders. Notably, the Group’s minimum finance service coverage ratio (“FSCR”) (with cash balances, post-distribution) on payment date is projected to come in at 1.96 times throughout the tenure of the IMTN Programme. Our cashflow analysis assumes that Cerah Sama will maximise distributions to shareholders, subject to meeting its financial covenants throughout the tenure of the debt facility (i.e. on a forward-looking basis, as opposed to only the year of assessment). Such financial covenants include compliance with the requirements of its finance service reserve account and debt-to-equity ratio, as well as a post-distribution FSCR of 2.00 times.

In relation to the Government’s recent announcement on the removal of toll plazas along the Highway, we note that although nothing has been firmed up just yet, the Highway’s existing toll rates and future increments may be restructured while compensation may take on non-monetary forms or through a combination of cash and a longer concession period. While Grand Saga had been adequately compensated by the Government for previous amendments of its concession agreement, future compensation arising from changes to the concession terms will need to be assessed for credit implications. All said, Cerah Sama’s credit profile remains moderated by single-site risk that is inherent in all toll-road projects.

A special-purpose vehicle, Selia Selatan’s business profile is anchored by its exclusive right to maintain federal roads in Negri Sembilan, Melaka and Johor, by way of a 15-year Privatisation Agreement (“PA”) with the Government of Malaysia (“GoM”). We note that its PA was recently extended for 10 years effective 16 February 2016 – conditional upon the signing of a new supplemental agreement. In addition, the Company also enjoys fairly steady margins throughout the concession period via its sub-contract agreements. Its counterparty risk is deemed low as the GoM is its sole obligor under the PA. Backed by its business profile, Selia Selatan’s debt-servicing ability has been consistently healthy.

The Company is envisaged to continue displaying a healthy debt-servicing ability on the Senior Bonds throughout their tenure. Despite the anticipated tighter pre-financing cashflow in FY June 2012, it is still envisaged to meet the requirements of its debt service reserve account (which is essentially more stringent post implementation of the BG facility). Selia Selatan also has the flexibility to defer the payment of sub-contracting costs to the related companies if required, as evidenced in the last 5 years.

As stated in the PA, Selia Selatan’s work rates had been scheduled for revision on 16 February 2011; approval for this is expected to be obtained by end-December 2011. Based on RAM Ratings’ interaction with the management, work rates are expected to be increased by 20%-25% effective January 2012. Even without these increases, its minimum and average debt-service coverage ratios (“DSCRs”) (with cash balances, post-distribution) on the Senior Bonds are envisaged to stay strong at 2.81 and 2.91 times, respectively.

As noted before, the Company’s remaining cash reserves after meeting its obligations on the Senior Bonds are not expected to be able to fully cover the repayment of the Junior Notes in their final year, i.e. 2014. Although its reserves would meet its payment obligations on the Junior Notes B, Selia Selatan’s ability to service this tranche cannot be examined in isolation from its obligations on the Junior Notes C, as both rank pari passu. However, the Company’s obligations on the Junior Notes B will be paid first as they rank ahead of the Junior Notes C under the cashflow waterfall. This enables the Junior Notes B to be accorded a 2-notch rating advantage over the Junior Notes C.

Published on 22 December 2011
RAM Ratings has reaffirmed the A1/P1 ratings of Road Builder (M) Sdn Bhd’s (“RBM” or “the Company”) RM400 million Commercial Papers/Medium-Term Notes Programme (2006/2013) (“CP/MTN”), with a stable outlook. RBM is principally engaged in construction and is wholly owned by IJM Corporation Berhad (“IJM” or “the Group”), a diversified conglomerate with interests in construction, property development, manufacturing and quarrying, plantation, tolling and port operations.

The ratings of RBM’s CP/MTN reflect the high likelihood of support from its parent, IJM, given the close connection between the 2 entities. The Company is expected to be able to count on ready support (business and financial) from IJM, if needed. The Group’s strong credit profile is underscored by its diversified earnings base as well as its established position in the construction and property sectors, in addition to its healthy financial profile.

On a stand-alone basis, RBM has established a sound track record in the local construction industry via its involvement in various civil-engineering and building projects, including tolled roads, dams, water-treatment plants, airports and properties. At present, the Company’s healthy RM600 million order book is underpinned by the ongoing apportionment of construction projects from IJM, given that the former’s operations and human resources have been fully integrated with the IJM Group’s construction division since 2007.

As at end-March 2011, RBM’s gearing level and funds from operations debt coverage ratio stood at a comfortable 0.42 times and 0.24 times, respectively. The Company has sufficient liquidity to cover its short-term debt obligations. Its cash balances of RM115.60 million as at end-September 2011 amply cover the last principal repayment of RM40 million on its CP/MTN in March 2012.

On the other hand, RBM is exposed to the cyclical and competitive construction industry, similar to all construction companies. Nonetheless, we maintain a positive outlook on the construction sector, underscored by the implementation of projects under Budget 2012, the 10th Malaysia Plan and the Economic Transformation Programme. This, in addition to IJM’s strong branding and track record, augurs well for the Group (and, in turn, RBM) in terms of order-book replenishment. We note that the Group has submitted bids for myriad contracts and had pre-qualified for various large-scale projects.

Dec 22, 2011 -
MARC has affirmed its rating of AAA on Gerbang Perdana CIQ Sdn Bhd’s (GPCIQ) RM1.7 billion Medium Term Notes (MTN) programme with a stable outlook. The rating action reflects the strength of the underlying payments on Government of Malaysia (GoM) issued facility payment certificates (FPC) securing the notes. Cash flows to maintain timely debt service on the rated notes depend on the GoM’s continued payment on the FPCs issued in connection with the construction of the integrated Customs, Immigration and Quarantine (CIQ) Complex in Johor Bahru. Accordingly, the ‘AAA’ rating and outlook reflects that of the GoM.

Wholly-owned by Gerbang Perdana Sdn Bhd, GPCIQ is a special purpose vehicle established to raise funding for the construction of the RM1.3 billion CIQ project which commenced in January 2003. The CIQ project consists of the main CIQ building (Bangunan Sultan Iskandar), an integrated transportation hub (JB Sentral), a marine customs complex and road links to the city. It was opened to all road traffic in December 2008 and to rail service in October 2010. All construction works were completed on November 30, 2011. Noteholders had not been exposed to any construction risk in that the payment certificates were only issued by the government upon certification of work done on the CIQ complex.

MARC notes that as the availability period for the MTN programme ended on November 8, 2011, no further drawdowns can be made. Current outstanding notes under the rated programme amounting to RM14.7 million are due on November 9, 2012, on which date the 8-year MTN programme is set to expire.

Thursday, December 22, 2011

MARC has affirmed its ratings of MARC-1ID/A+ID on Weida (M) Bhd’s (Weida) RM100 million 7-year Murabahah Underwritten Notes Issuance (MUNIF)/Islamic Medium Term Notes Facility (IMTN). The outlook on the ratings is stable.

The rating action incorporates the partially funded designated account that Weida has recently set up to improve the certainty of full and timely repayment of its remaining outstanding notes of RM25 million. The designated account is initially funded at RM10 million; Weida will make three equal monthly payments of RM5 million each from January to March 2012 to ensure the account is fully funded with cash prior to the notes’ April 5, 2012 redemption date. MARC considers the level of credit support provided by the cash funded debt service account to be sufficient to affirm Weida’s issue ratings notwithstanding the increase in the company’s overall credit risk profile due to the pressure exerted by growth-related capital spending on the financial metrics of the group and holding company.

Weida’s near-term credit profile is also constrained by its increased sovereign risk exposure in respect of its water and wastewater treatment project in the Syrian Arab Republic. Earnings generation from Weida’s strategic initiatives has lagged capital spending and MARC does not expect any major improvement in Weida’s free cash flow generation prior to its April 2012 notes maturity on account of its significant planned capital spending for its plantation division in the months ahead.

Sarawak-based Weida has a long track record as a major domestic manufacturer of high-density polyethylene (HDPE) products but has diversified into construction of water and telecommunication infrastructure and, recently, oil palm cultivation. Weida’s HDPE business has continuously benefited from government-funded rural water infrastructure projects, particularly in its home market of East Malaysia. MARC recognises the challenges and execution risk associated with its strategy to penetrate the more fragmented West Malaysia market.

MARC believes that Weida’s diversification into oil palm plantation has had the most significant impact on its credit profile. The rating agency notes that to date, Weida has spent over RM60 million of plantation development expenditure on its 6,500 ha palm oil estate in Bintulu, Sarawak and plans to incur another RM21 million of planting expenditure in FY2012. The plantation operations are only expected to start contributing positively to the group’s earnings after the expiry of its rated facility in FY2012.

Weida’s works division overtook its manufacturing division as the largest revenue and earnings contributor in its financial results for the 12 months to March 31, 2011 (FY2011). Following the completion of its construction works for 244 telco towers in Sabah under Malaysian Commission and Multimedia Communication’s (MCMC) Time-2 programme, a key driver of the division’s earnings has been construction contracts awarded under the Time-3 programme. The 244 completed telco towers under MCMC’s Time-2 programme currently generate a recurring rental income of about RM9.60 million per annum. From September 2010 through July 2011, Weida has secured RM68 million worth of contracts to construct a total of 88 towers under the Time-3 programme. Unlike the telco towers constructed under the Time-2 programme, there are no recurring monthly lease payments due from the telcos under the Time-3 programme, only construction receivables due from MCMC upon the completion of the towers. The rating agency notes the pressure on Weida’s working capital exerted by the uneven order flow and absence of milestone billing but takes comfort from its successful procurement of term financing to fund its telco tower construction activities.

The escalating Syrian Arab Republic conflict has increased non-completion risk with respect to Weida’s outstanding works on a €60 million turnkey contract from the Syrian government for the construction of water and sewerage treatment plants in the country. To date, about 94%, or €47.7 million, of the €50.5 million worth of work orders has been completed. The project contributed RM34 million to the company’s revenue and RM3.0 million in pre-tax profits in FY2011. MARC understands that the company is seeking to withdraw from the turnkey contract upon completion of the current work orders. While progress payments for the project have been prompt, the current unrest in Syria could place progress claims retained by the Syrian government of €3.8 million at an increased risk of write-off or impairment. Of the aforementioned €3.8 million, Weida expects the Syrian government to release €2.9 million in 2012 and the balance in 2013. MARC notes Weida has not made any provisions with respect to its Syrian project receivables, and believes that any subsequent provisions to be made could impact its near-term bottom-line profitability.

In FY2011, Weida’s consolidated revenue and pre-tax profit rose by 4.9% and 45.6% to RM285.9 million and RM34.5 million respectively. However, it recorded a cash flow from operations (CFO) deficit of RM7.8 million, and an even higher negative free cash flow of RM37.7 million as a result of its plantation division’s heavy capital expenditure. MARC notes a steady lengthening of its average debtors’ collection period post-FY2010 and additional debt that Weida has been incurring to fund its negative free cash flow. Additional debt taken to fund its business expansion and diversification programmes include draw downs from an existing RM51 million term loan for its plantation division and a new RM26.3 million term loan for its telco tower construction division. MARC also observes a weakening of the holding company debt service coverage and financial leverage metrics, evidenced by its negative CFO of RM19.1 million and an increase in its debt to equity ratio to 0.88 times as at March 31, 2011 from 0.58 times a year ago.

The stable outlook on the rating is based upon the expectation that the debt service account will be fully funded by March 2012, making the ultimate source of repayment for the notes less dependent on refinancing events.

MARC has affirmed its AAAID(s) rating on Sarawak Specialist Hospital & Medical Centre Sdn Bhd’s (SSHMC) RM425 million Istisna’ Serial Bonds. The rating carries a stable outlook. The issuer is a 100%-owned subsidiary of SSHMC Holdings and Management Sdn Bhd (SSHMC Holdings), which in turn is wholly-owned by the State Financial Secretary (SFS). The rating reflects the SFS’ irrevocable and unconditional obligation to subscribe to non-cumulative redeemable preference shares (RPS) in SSHMC Holdings, the proceeds of which provide the underlying source of debt service for the bonds.

The rating on the bonds has been affirmed following MARC’s review of its public information rating on the state of Sarawak which the rating agency has affirmed at AAA with a stable outlook. The rating on Sarawak reflects the state’s strong fiscal performance, low debt burden and fairly strong financial management practices. MARC considers SFS’ obligations as obligations of the state on the basis of its status as the State Financial Authority and its associated responsibility for the financial management of the state.

SSHMC had issued eight tranches of bonds amounting to RM425 million to fund the construction of Sarawak International Medical Centre (SIMC) and the purchase of hospital equipment. The construction of the hospital began in 2003, but was only completed in January 2011. The 166-bed hospital is now operated by the Sarawak General Hospital (SGH) as the Sarawak General Hospital Heart Centre (SGHC).

To date, SSHMC has redeemed RM248 million of Istisna’ Bonds with proceeds from RPS issuances to SSHMC Holdings. The parent’s subscriptions of RPS are funded by mirror issuances of RPS to the SFS. Consequently, the credit profile for the bonds does not depend on the operating and financial performance of the hospital. As of September 30, 2011, SSHMC has total outstanding of RM177 million bonds, with the last series of bonds maturing in September 2014.

Given that the AAAID(s) issue rating is driven by government support for SSHMC’s obligations on the bonds through SFS’ subscriptions of RPS in its parent, the rating and outlook would mirror any potential change in MARC’s public information rating and rating outlook on Sarawak.

MARC has affirmed CIMB Islamic Bank Berhad’s (CIMB Islamic) long-term financial institution rating at AAA and concurrently affirmed its rating on CIMB Islamic’s Tier 2 Junior Sukuk Programme at AA+IS. The outlook on the long-term rating is stable. CIMB Islamic’s financial institution rating is equated to parent CIMB Bank Berhad’s (CIMB Bank), on account of the high level of the Islamic bank’s integration with and support from CIMB Bank. CIMB Islamic also derives credit strength from being part of a larger group, CIMB Group, on account of the group’s very strong competitive position, sustainable core profitability, strong credit metrics and focused growth strategy. CIMB Islamic’s Junior Sukuk is rated one notch lower than its financial institution rating due to the subordination of the Sukuk to the bank’s deposits and its other senior unsecured debt.

CIMB Islamic was incorporated as a wholly-owned subsidiary of CIMB Bank to spearhead the Islamic banking activities of the Group. CIMB Islamic’s banking model leverages its parent bank’s banking infrastructure and resources. CIMB Islamic continues to enhance its Islamic banking franchise through its active participation in the domestic Islamic capital market and the constant roll-out of new retail offering. This has contributed positively to the bank’s recurring income generation and balance sheet growth. For the first six months of 2011, financing growth moderated to 7.5% following a strong full-year financing growth of 38.9% for the 12 months ended December 31, 2010 (FY2010). Meanwhile, the bank’s gross impaired financing ratio improved slightly to 1.4% (FY2010: 1.5%). Over half of the bank’s financing portfolio is allocated to working capital and residential property financing, which accounted for 28.3% and 25.3% of the bank’s financing portfolio as at end-1H2011.

CIMB Islamic’s customer deposits stood at RM23.0 billion as at end 1H2011, however as the growth in the bank’s financing outpaced its deposit growth, financing to customer deposits ratio came in higher at 106.0%, indicating an increasing dependence on non-core funding sources. Inter-bank deposits increased by 35.3% in FY2010 to support the growth in financing activity during the year. About 82% of its inter-bank deposits or RM9.1 billion is placed by CIMB Bank, which underscores the operational and financial linkages between the two entities.

The bank’s profitability continued its growth momentum in FY2010 with its profit after tax more than doubling to RM301.8 million from FY2009’s RM123.7 million. The strong performance is reflective of the bank’s return on assets which was 0.95% (FY2009 ROA: 0.54%). In 1H2011, the bank recorded a profit after tax of RM197.9 million compared to RM118.0 million in the previous corresponding period. The bank’s profitability was supported by a much lower allowance for impaired financing and higher financing income during the first half of the year.

The bank’s capital levels remained healthy with Tier-1 capital adequacy ratio (CAR) and Total CAR at 10.9% and 15.0% respectively as at end-1H2011, relative to Malaysia’s Islamic banking system ratios of 12.0% and 14.9% respectively. In tandem with the growth in risk weighted assets during the first half of the year, the bank had also enhanced its capital base through the issuance of RM250 million ordinary shares and the issuance of another RM250 million Sukuk from the current rated Programme.

The stable outlook on CIMB Islamic is underpinned by the stable rating outlook of its parent.

MARC has downgraded its ratings on Maxtral Industry Berhad's (Maxtral) RM80 million Al-Bai' Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities to BBB-ID and MARC-4ID/BBB-ID from BBB+ID and MARC-3ID/BBB+ID respectively. Concurrently, the ratings have been placed on MARCWatch Negative. The rating action affects RM20 million of BaIDS outstanding under the RM80 million BaIDS programme and RM20 million notes issued under the MUNIF/MMTN programme.

The ratings downgrade and MARCWatch placement reflects Maxtral's declining cash position and dependence on asset disposals to meet forthcoming debt repayments, stemming from a sustained contraction of its sales and negative cash flow generation. It also incorporates significant uncertainty as to the issuer's ability to accelerate asset disposals in order to address its forthcoming sinking fund build-up payments on its BaIDS in January 2012 and March 2012 of RM10 million each, and to meet its final MUNIF principal repayment of RM20 million on April 18, 2012. Although the company has taken actions to dispose its plantation and property land, MARC believes that there is an increased risk that Maxtral will be unable to raise the required proceeds in time to maintain compliance with its sinking fund schedule.

The MARCWatch negative placement also considers the heightened risk of an acceleration of the BaIDS in the event that the forthcoming sinking fund payments are missed and approval is not obtained from BaIDSholders for an extension of payment due.

Since MARC's previous downgrade of the ratings in May 2011, Maxtral's financial profile has experienced further deterioration. Its third quarter results showed a steep decline in revenue for the three months to September 30, 2011 and a higher pre-tax operating loss of RM3.3 million compared to the preceding year quarter. The latest results increased Maxtral's year-to-date pre-tax operating losses to RM12.2 million (9MFY2010: RM7.7 million). MARC is concerned over the further deterioration of its liquidity position; Maxtral's cash and cash equivalents as at September 30, 2011 were only RM1.4 million compared to its short-term borrowings of RM62.9 million. The rating agency is also aware that noteholders will not be allowing Maxtral to roll over its maturing notes on April 18, 2012. Maxtral expects the proceeds from the disposal of its plantation land and property land, which have a combined market value of RM72.0 million, to be sufficient to cover its repayment obligations on the BaIDS and MUNIF.

MARC will continue to monitor the progress of Maxtral's asset disposals as well as its compliance with its BaIDS sinking fund schedule and negotiations, if any, with BaIDSholders and noteholders to resolve the MARCWatch placement.

Wednesday, December 21, 2011

GLOBAL: Following months of anticipation and the surprise announcement that AAOIFI’s outgoing secretary general, Dr Mohamad Nedal Alchaar, will leave the post to assume the position of Syria’s minister of economy and trade, the industry accounting body has announced the appointment of Dr Khaled Al Fakih as its new secretary general.

In announcing the decision, Shaikh Ebrahim Khalifa Al Khalifa, the chairman of AAOIFI’s board of trustees, expressed his confidence in Khaled’s ability to steer the organization to an even stronger position in discharging its responsibilities in developing and issuing standards for the global Islamic finance industry.

Currently the head of Islamic banking operations at Lebanon’s Bank Audi, Khaled’s experience covers Islamic law, risk management, audit and technical finance. He possesses a PhD in Islamic studies from Lebanon’s University of Saint Joseph; and an MBA in banking and finance.

He is also a certified financial risk manager, certified management accounted, certified internal auditor and certified financial services auditor. In addition, Khaled is a member of the Association of Banks in Lebanon’s (ABL) Islamic banking committee; and AAOIFI’s Shariah standards committee.

Khaled has also gained experience on the global scene, having participated in international initiatives in collaboration with the IMF, the Union of Arab Banks and the ABL.

Meanwhile, Mohamad Nedal will continue to oversee AAOIFI’s operations during the transition period leading up to the 1st February 2012, when Khaled’s appointment takes effect. The outgoing secretary general will also continue to serve as a member of the organization’s board of trustees.

Published on 19 December 2011
RAM Ratings has reaffirmed the respective AA3 and P1 ratings of Gamuda Berhad’s (“Gamuda” or “the Group”) proposed 25-year RM800 million Islamic Medium-Term Notes Programme and 7-year RM100 million Islamic Commercial Papers Programme, as well as those of its existing RM800 million Islamic Medium-Term Notes Programme (2008/2028) and RM100 million Commercial Papers Programme (2008/2015). Both long-term ratings have a stable outlook. Each of the combined facilities will be capped at RM800 million at all times.

Gamuda and its subsidiaries are principally involved in civil engineering and construction, property development, tolling operations, and the operation and maintenance of water-treatment plants. “Gamuda’s solid reputation and track record of project-execution capability will continue to make it a strong contender for complex large-scale projects, both domestically and internationally. We believe the gradual decline in its order book following the substantial completion of its overseas projects will be turned around by the upcoming jobs under the Economic Transformation Programme, the Tenth Malaysia Plan and Budget 2012. The Group also derives some earnings diversity from its property developments and concession assets,” observes Shahina Azura Halip, RAM Ratings’ Head of Real Estate and Construction Ratings. Gamuda’s outstanding construction order book of around RM2.59 billion and RM1.01 billion of unbilled property sales (as at end-July 2011) should assure revenue stability through the next 2 years.

Gamuda’s ratings are moderated by the significant concentration and execution risks related to the Group’s projects. Presently, the electrified double-track railway project constitutes 85% of its order book. This heavy reliance on just a couple of projects (i.e. the electrified double-track railway project and the potential Klang Valley MY Rapid Transit tunnelling project) is exacerbated by execution and integration risks arising from the complexity of the work involved.

Meanwhile, Gamuda’s significantly lower leverage (its debt load is about 30% lighter than previously projected for fiscal 2011) is a result of the slower-than-expected regulatory approvals for its Vietnamese projects. Going forward, RAM Ratings anticipates a more gradual and conservative gearing up of the Group’s balance sheet as it moderates its property launches in Vietnam amidst the sluggish property market there. The Group’s debt burden is expected to peak at around RM2.56 billion in FY July 2013, with a net gearing ratio of 0.41 times. Over the next 2 years, its operating profit before depreciation, interest and tax debt cover and funds from operations debt cover will range around 0.20–0.25 times and 0.13–0.18 times, respectively.

Up to last Thursday, he said, the scheme registered a gross income of RM7.19bil.

“Dividend income from investee companies contributed RM4.09bil, or 56.9%, of the gross income and profit from the sale of shares contributed RM2.25bil or 31.3%,” he told a media briefing here yesterday.

He said the remaining 11.8%, or RM0.85bil, was derived from investment in short-term instruments and other investments.

Ahmad Sarji said the income distribution and bonus would be automatically credited into the respective unitholder's account and unitholders could update their accounts beginning Jan 3 next year.

“All transactions for ASB will be suspended beginning Dec 21, 2011 until Jan 2, 2012 to facilitate the calculation of income distribution and bonus,” he said.

He said the ASB's performance during the year was satisfactory even in the last quarter of this year, with the stock market performance influenced by the US economic uncertainty and Europe's debt crisis.

Meanwhile, its president/chief executive officer Tan Sri Hamad Kama Piah Che Othman said PNB would make sure it would continue to not only pay dividend every year but also to create growth for the future.

On the takeover of SP Setia Bhd, he said PNB was still awaiting approval from the Securities Commission (SC).

“We have submitted it to the SC and are now waiting for its approval,” he said.

On the progress of the Menara Warisan project, he said: “PNB has submitted the design order to the authorities and we will announce it when we get approval.” - Bernama

Published on 13 December 2011
RAM Ratings has reaffirmed the enhanced AAA(s) rating of KL International Airport Berhad’s (“KLIA Berhad” or “the Company”) RM4.06 billion Bai’ Bithaman Ajil Notes Issuance Facility (2003/2015) (“KLIA Notes Facility”), with a stable outlook. The enhanced rating is premised on the unconditional and irrevocable guarantee by the Government of Malaysia (“GoM”) to repay all amounts due under the KLIA Notes Facility.

Incorporated on 29 May 1993, KLIA Berhad is wholly owned by the GoM via the Ministry of Finance (Incorporated) (“MoF”). The Company had been set up as a conduit for the GoM to fund the construction and development of Kuala Lumpur International Airport (“KLIA”).

Upon the completion of KLIA in 1998, the ownership and all outstanding liabilities of the airport had been transferred to the MoF. In 1999, however, the GoM advised the Company to reinstate the outstanding liabilities in relation to the construction of the airport. Since then, KLIA Berhad has been responsible for the repayment of all outstanding liabilities, including the KLIA Notes Facility; the MoF undertakes to provide all the necessary funding to settle these outstanding liabilities.

KLIA Berhad is an operationally dormant company; its income is solely derived from dividends on its investments in unit trusts and interest earned on deposits in financial institutions. The Company’s expenses are minimal and mainly comprise rental payments, legal charges, management fees and company secretarial fees. As at end-June 2011, the outstanding amount under the KLIA Notes Facility stood at RM2.06 billion.

Dec 16, 2011 -
MARC is maintaining its review of the BBIS and MARC-4IS Sukuk ratings of funding vehicle Offshoreworks Capital Sdn Bhd (OWC) for further downgrade due to a continuing lack of clarity about the issuer's liquidity situation, annual and interim results of its parent company and the progress of debt restructuring negotiations with sukukholders. The rating agency had previously commented that its ratings review would focus on the outcome of OWC's debt restructuring negotiations and the near-term financial profile of oilfield services provider Offshoreworks Holdings Sdn Bhd (OHSB).

Since MARC's decision to extend its review on the sukuk ratings in September 2011, OWC has yet to disclose the details of the restructuring plans proposed by OWC to its sukukholders and to make available its audited financial statements of OHSB for the financial year ended December 31, 2010. MARC has been unable to conclude its review and believes that it has insufficient access to adequate public and/or non-public information to maintain ratings on the sukuk. OHSB's unaudited financial statements for 2010 had indicated that the group was in a tenuous financial position with negative shareholders funds of RM56.8 million and modest cash balances. The rating agency is concerned that OHSB's financial profile could have experienced further deterioration in its credit profile since then.
The rating agency will likely withdraw or suspend the ratings within the next 30 days if the requested information is not forthcoming.

Published on 14 December 2011
RAM Ratings has reaffirmed the respective short- and long-term ratings of P1 and A1 for Blondal Resources Sdn Bhd’s (Blondal Resources) RM70 million Commercial Papers and Medium-Term Notes Programme (CP/MTN); the long-term rating has a stable outlook. Blondal Resources had been specifically incorporated to undertake the securitisation of the hire-purchase (HP) receivables of Blondal Sdn Bhd’s (Blondal) subsidiary – Primuda Sdn Bhd (Primuda) - via the issuance of the CP/MTN. Blondal is involved in direct sales of household and industrial appliances, primarily under the Lux, Städa and HydroGuard brands.

The reaffirmation of the ratings is premised on the overcollateralisation (OC) levels of the CP/MTN. As at end-August 2011, Blondal Resources had RM11.00 million of outstanding CP, supported by RM20.25 million of HP receivables (the Portfolio); this resulted in a collateralisation level of 211% against the required minimum of 180% to maintain the A1/P1 ratings. The greater-than-required collateralisation is a result of Blondal’s replacement of defaulted/repossessed accounts as per the transaction requirements, which we opine provides sufficient protection against the risk of the Portfolio experiencing higher levels of defaults.

Based on updated historical data, the cumulative net default rate of the Portfolio stood at 7.07%, compared with our base-case assumption of 5.50%. The higher-than-expected default rate has been mainly driven by defaults on HP receivables (sewing machines and indoor water filters) originated in 2008/09. That said, HP receivables on outdoor point-of-entry (POE) water filters – currently the largest segment of receivables for Blondal and the Portfolio – show cumulative net default rates of 6.00% to 6.50%. This is the key reason for the easing of the Portfolio’s average monthly gross default rate, from 0.67% in 2010 to 0.57% in the first 8 months of 2011, supported by Blondal’s improved credit-approval and collection processes. In this regard, we have revised the base-case peak cumulative net default rate from 5.50% to 6.50%, to reflect our expectation that HP financing on POE water filters will increasingly form the bulk of Blondal’s receivables and the securitised pool. However, the minimum required collateralisation of 180% remains unchanged given the shorter remaining tenure of the transaction.

As of end-August 2011, Blondal had replaced the RM19.74 million of “losses arising from defaults and repossession” with RM21.60 million of new receivables. We highlight that the increased OC and dependence on Blondal’s replacement are more crucial given the current higher default levels of the Portfolio, which are expected to taper off. In this respect, the sustainability of the OC level relies on Blondal’s business continuity and HP loan origination; we derive some comfort from its 38-year operating track record. Failure to replace these receivables is tantamount to an early amortisation event.

While Blondal has provided an irrevocable corporate guarantee on all amounts due and payable under the CP/MTN, RAM Ratings has not placed any weight on this guarantee. Based on its latest financials, Blondal has managed to ride out the crisis and appears on track towards turning around its operating performance in FY Dec 2011. RAM Ratings will continue monitoring Blondal’s operations, i.e. sales and HP origination, as well as its financial position.

Dec 13, 2011 -
MARC has affirmed the rating of Instacom SPV Sdn Bhd’s (ISPV) RM200 million Murabahah Medium Term Notes (MMTN) Programme at AAID. The outlook on the rating is stable. ISPV is a wholly-owned subsidiary of Instacom Engineering Sdn Bhd (IESB) set up to facilitate the issuance of the MMTN to finance the purchase of completed telecommunication towers (telco towers) constructed by IESB. The affirmed rating reflects the credit quality of the rental payment stream from the three main domestic telecommunication companies (telco companies), and contract proceeds from telco towers constructed on behalf of DiGi Telecommunications Sdn Bhd (DiGi), against which the repayment of the notes is secured. Additionally, noteholders are not exposed to construction and commingling risks; drawdowns under the note facility can only be made with respect to completed telco towers and all assigned revenues arising from tower rentals and construction are paid into trustee-controlled designated accounts.

Sarawak-based IESB was awarded a 3-year turnkey contract in 2005 by Desabina Industries Sdn Bhd (DISB), a Terengganu state-backed company (SBC), to construct telco towers in Terengganu under the Malaysian Communication and Multimedia Commission’s (MCMC) Time-2 (T2) programme. The contract ended in 2008 following the completion of the construction of 84 telco towers. The completed towers were leased for seven years under a licence agreement signed between Desabina and telco companies. Desabina has surrendered its rights to rental payments to ISPV for the repayment of the issued notes and, to a lesser extent, maintenance and upkeep of the towers. The lease rental amount is dependent on several factors: height of the towers, the number of telco companies sharing the towers and any variation orders for the towers. The strong financial profiles of the three main domestic mobile operators, Maxis Berhad, Celcom Axiata Berhad, and DiGi, continue to underpin the credit strength of the rental payment stream.

ISPV is also allowed to utilise the MMTN facility to finance telco tower construction contracts signed between IESB and other telco and SBCs. As of date, IESB has entered into a telco tower construction contract with DiGi under which lump sum payments are made upon the completion of the towers. A total of 883 towers have been constructed under this contract. The short-term nature of the financing required has minimised cash flow mismatch risk and provides some measure of predictability to ISPV’s cash flow stream.

In the current financial year, RM15 million of RM20 million notes due were redeemed. ISPV’s cash balance of RM19.6 million as at end-August 2011 is more than sufficient to meet its scheduled obligations under the programme for the next six months. Currently, total notes outstanding under the rated facility amount to RM56 million. Over the next 12 months, ISPV’s finance service cover ratio (FSCR) is expected to range between 1.26 times and 3.63 times, as compared to FY2010’s 2.93 times and the programme’s FSCR covenant of 1.25 times.

IESB is undertaking a corporate exercise with I-Power Berhad (I-Power), a Bursa Malaysia Ace Market-listed company involved in e-business software development and software integration services. Upon completion, IESB shareholders will have a 71% stake in I-Power. The transaction is not expected to have any impact on ISPV as it would remain a wholly-owned subsidiary of IESB. MARC has received confirmation from the issuer that the corporate exercise does not breach any covenants made by ISPV in the issuance of the MMTN.

The current stable outlook on the rating incorporates expectations of continued timely payments from existing towers.

Tuesday, December 20, 2011

GLOBAL: HSBC Amanah, which is optimistic on its growth this year and going into next, sees the emerging markets of Asia and the Middle East as an integral component of the growth of the Shariah compliant financial industry.

"Islamic finance is an emerging markets phenomenon; 80% of the world's Muslims live in Asia and the Middle East. Given that these regions are set to grow faster than the world average, Islamic finance is thus likely to continue growing faster than conventional banking. This is further helped by the fact that growth of Islamic finance has been primarily led by customer pull and not a regulatory push," said Razi Fakih, the global deputy CEO of HSBC Amanah.

Monday, December 19, 2011

Published on 09 December 2011
RAM Ratings has reaffirmed the AA1 rating of Panglima Power Sdn Bhd’s (“Panglima” or “the Company”) RM830 million Redeemable Secured Serial Bonds (“Serial Bonds”), with a stable outlook. Panglima is an independent power producer (“IPP”) that owns and operates a 720-MW nominal-capacity, combined-cycle, gas-turbine power plant in Teluk Gong, Melaka.

The rating remains supported by Panglima’s strong business profile. In FYE 31 January 2011 (“FY Jan 2011”), the Company delivered a satisfactory operational performance, having met most of the operating parameters under its power purchase agreement (“PPA”) with Tenaga Nasional Berhad (“TNB”). Although Panglima was unable to claim full available capacity payments owing to 2 incidents of failure to despatch instructions, the shortfall was minimal and had no detrimental effect on the Company’s debt-servicing ability. Meanwhile, the plant’s heat rates had been kept below the PPA’s allowable levels, thus allowing Panglima to fully pass through its fuel costs to TNB.

The Company’s debt-servicing ability remained intact in FY Jan 2011, with a debt-service coverage ratio (“DSCR”) of 2.43 times (with cash balances, post-distribution). Looking ahead, Panglima is expected to register minimum and average DSCRs (with cash balances, post-distribution) of 1.60 times and 2.15 times, respectively, on principal repayment dates. RAM Ratings understands that the Company will retain sufficient cash to prioritise its debt-servicing obligations and potential maintenance expenditure throughout the tenure of the Serial Bonds.

Similar to other IPPs, however, Panglima remains exposed to regulatory and single-project risks.